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The Berkshire Hathaway chief executive said he has bought nearly $11 billion of International Business Machines Corp stock in the last eight months, building a roughly 5.5 percent stake that potentially makes him the largest shareholder in the company.

It was a surprise reversal for Buffett, who has always said he would not invest in technology because he largely did not understand it. But in an interview on cable television network CNBC, Buffett said he was struck by IBM's ability to retain corporate clients, which made it indispensable in a way that few other services are.

"It's a company that helps IT departments do their job better. It is a big deal for a big company to change auditors, change law firms" or to switch to a new technology vendor, Buffett said.

"I don't know of any large company that really has been as specific on what they intend to do and how they intend to do it as IBM," said Buffett, who teased CNBC's anchors for a few minutes with a guessing game about what the major investment was before unveiling the IBM news.

IBM shares, which have a market value of about $220 billion, were up 0.2 percent to $187.79 in afternoon trading. Earlier they hit $189.84, nearing the all-time high of $190.53 that the stock touched in mid-October.

Buffett, known as one of the best value investors of all time, appeared to have come to IBM late in the game -- a year ago the stock was a third lower than it is now. Buffett himself said he should have paid more attention to IBM five years ago.

Yet technology analysts said he had still gotten a good deal.

"Maybe he could have gotten a better price ... but if you look at Warren Buffett's investment policy I would assume this is a long term investment," said Collins Stewart analyst Louis Miscioscia. "This is not your father's IBM; the management has done a good job of cost control, returning cash to shareholders."

CHANGE OF PLANS

Though it seems like a contrarian move, one long-time Berkshire investor speculated that Buffett was buying IBM for its services business rather than its technology platform.

"It's going to be one of the four or five 'generals' in the portfolio," said Steve Check, chief investment officer of Check Capital Management, a California firm.

Another long-standing Berkshire shareholder said the investment was also a global play.

"More confirm(ation) that he sees international as more important," said Michael Yoshikami, chief executive of wealth manager YCMNET Advisers, which manages about $1 billion and holds Berkshire shares.

The investment fits with Buffett's desire to make big bets. Earlier this year, in his annual letter to investors, he joked about having a loaded elephant gun ready to make big deals.

He has followed through on that, buying chemicals company Lubrizol, investing $5 billion in Bank of America Corp and taking the IBM position.

Though Berkshire started buying IBM shares in March, Buffett's comments suggested the firm did not cross reporting thresholds on the investment until the third quarter, which let him keep the stake secret until Monday.

Buffett has also previously asked for, and received, the right to keep some investments temporarily confidential on the grounds that, given his notoriety, if his trades were to be known, masses of investors might try to pile in as well.

The IBM stake was so confidential, in fact, that the company had no idea Buffett was investing in it until he disclosed that he had bought 64 million shares on TV on Monday. An IBM spokesman declined to comment.

According to Thomson Reuters data, Buffett's 5.5 percent position in IBM would tie him with State Street Corpinvestment management affiliate State Street Global Advisors for the largest stake in the company.

During the third quarter, IBM shares traded in a range of $157.14 to $185.61, suggesting that no matter when Buffett bought, he is still up on his investment at least $160 million.

The median analyst price target for the stock is $200, with 14 of 28 analysts rating it a "strong buy" or "buy" and the rest rating it a "hold," according to Thomson Reuters data.

NOT BUYING EUROPE

One thing Buffett is not buying is European banks.

Buffett comes up whenever there is talk of a large European bank needing to raise capital, particularly in the current environment of writedowns on sovereign debt.

But he told CNBC that he would need to understand European banks better before investing, and that he has not yet seen an investment opportunity there in which he wants to take part.

The "Oracle of Omaha" and Berkshire Hathaway chief executive said he expects Europe's economy to show improvement 10 years from now, but getting there will be difficult.

In a three-hour interview, Buffett also disclosed that he was interviewed by the U.S. Securities and Exchange Commission in June about David Sokol, his former heir apparent who left Berkshire amid scandal earlier this year.

Sokol left the company after it emerged he had bought shares in Lubrizol while trying to convince Buffett to acquire it.

Buffett said he had an informal interview with the SEC, which was not a deposition and was not transcribed by a court reporter. He told CNBC the SEC had questions it wanted answered, and he and Berkshire were cooperating.

The Sokol episode turned into a major scandal for Berkshire earlier this year, with Buffett conceding at the company's annual meeting that he had handled the matter poorly. (Reporting by Ben Berkowitz in New York, additional reporting by Nicola Leske in New York and Jim Finkle in Boston; Editing by Tiffany Wu and Gerald E. McCormick)

Jittery European credit markets also hurt sentiment in Asia, sharply widening the spreads on the iTraxx Asia ex-Japan investment grade index -- a gauge of investor appetite for risk. The spread was about 10 basis points wider on Tuesday.

MSCI's broadest index of Asia Pacific shares outside Japan fell 0.5 percent, tracking a drop in global equity markets the previous day, while Japan's Nikkei stock average .N225 fell 0.4 percent.

"Italy can't find buyers to finance its debt, as fears over high price volatility in Italian bonds and speculators hitting shares of banks with huge exposure to Italy have made European financial institutions, traditionally long-term investors, wary of purchases," said Takashi Nakagawa, a senior credit analyst at Daiwa Capital Markets.

Italy sold 3 billion euros ($4.1 billion) of five-year bonds at 6.29 percent on Monday, a euro-era record, fuelling worries the high borrowing costs would derail the country's efforts to slash its 1.9 trillion euro worth of debt.

Yields on benchmark Italian 10-year bonds climbed to 14-year highs of around 7.5 percent last week before Prime Minister Silvio Berlusconi stepped down.

Italy's 10-year bond yields rose to 6.76 percent on Monday, also pushing Spanish 10-year yields above 6 percent for the first time since the European Central Bank started to buy the country's bonds in August.

The spread, or interest rate gap, of Italian bonds over German government bonds remained just below 500 basis points.

"Global financial markets are facing a key pivotal point," said Barclays Capital analysts in a research note.

"A further escalation of the European debt crisis is putting at risk the nascent stabilization of global growth and the associated buoyancy of risky assets outside of Europe," they said, adding the European authorities could limit the damage through more involvement of the European Central Bank.

But Bundesbank President Jens Weidmann on Monday rebuffed such global pressure for the ECB to become a lender of last resort, saying it could undermine the central bank's hard-won credibility.

CAPITAL BOOST

Sharp downturns in financial markets have raised the urgent need for recapitalization at banks, prompting them to sell assets to make up for losses elsewhere.

Hong Kong's Hang Seng index .HSI fell 0.7 percent, with China Construction Bank Corp (0939.HK) dragging the market lower. Shares in CCB fell 2 percent on Tuesday after Bank of America (BAC.N) decided to sell most of its remaining stake in the Chinese lender to shore up its capital.

There was better news in Chinese debt markets, with the city of Shanghai attracting very strong demand as it became the first local government to sell debt directly into the market, signaling keen investor interest in the new type of instrument.

After Shanghai's inaugural sale, the southern province of Guangdong plans to issue 6.9 billion yuan in bonds on Friday.

Financial market turmoil stemming from the euro zone sovereign debt crisis has taken a clear toll on the region's economy, with investors seeking clues over whether the euro zone could face a recession.

Later on Tuesday, the first estimate of euro-area gross domestic product for the third quarter will be published, following the region's industrial production data released on Monday, which showed a 2 percent decline in September.

The slide was the biggest fall since February 2009, and pointed to a sharp contraction toward the end of the year and a growing threat of a fall into recession.

Leadership changes in Italy and Greece failed to dispel market worries about their ability to resolve the debt crisis,

putting a firm cap on the single currency against the dollar.

The euro traded at $1.3626 on Tuesday, after falling as low as $1.3590 on Monday, when it broke below support at its 100-week moving average around $1.3638.

The currency was expected to find support around the low in September around $1.3360, while resistance was seen near $1.3870, a November high, technical analysts said.

(Editing by Alex Richardson)

The Berkshire Hathaway chief executive said he has bought nearly $11 billion of International Business Machines Corp stock in the last eight months, building a roughly 5.5 percent stake that potentially makes him the largest shareholder in the company.

It was a surprise reversal for Buffett, who has always said he would not invest in technology because he largely did not understand it. But in an interview on cable television network CNBC, Buffett said he was struck by IBM's ability to retain corporate clients, which made it indispensable in a way that few other services are.

"It's a company that helps IT departments do their job better. It is a big deal for a big company to change auditors, change law firms" or to switch to a new technology vendor, Buffett said.

"I don't know of any large company that really has been as specific on what they intend to do and how they intend to do it as IBM," said Buffett, who teased CNBC's anchors for a few minutes with a guessing game about what the major investment was before unveiling the IBM news.

IBM shares, which have a market value of about $220 billion, were up 0.2 percent to $187.79 in afternoon trading. Earlier they hit $189.84, nearing the all-time high of $190.53 that the stock touched in mid-October.

Buffett, known as one of the best value investors of all time, appeared to have come to IBM late in the game -- a year ago the stock was a third lower than it is now. Buffett himself said he should have paid more attention to IBM five years ago.

Yet technology analysts said he had still gotten a good deal.

"Maybe he could have gotten a better price ... but if you look at Warren Buffett's investment policy I would assume this is a long term investment," said Collins Stewart analyst Louis Miscioscia. "This is not your father's IBM; the management has done a good job of cost control, returning cash to shareholders."

CHANGE OF PLANS

Though it seems like a contrarian move, one long-time Berkshire investor speculated that Buffett was buying IBM for its services business rather than its technology platform.

"It's going to be one of the four or five 'generals' in the portfolio," said Steve Check, chief investment officer of Check Capital Management, a California firm.

Another long-standing Berkshire shareholder said the investment was also a global play.

"More confirm(ation) that he sees international as more important," said Michael Yoshikami, chief executive of wealth manager YCMNET Advisers, which manages about $1 billion and holds Berkshire shares.

The investment fits with Buffett's desire to make big bets. Earlier this year, in his annual letter to investors, he joked about having a loaded elephant gun ready to make big deals.

He has followed through on that, buying chemicals company Lubrizol, investing $5 billion in Bank of America Corp and taking the IBM position.

Though Berkshire started buying IBM shares in March, Buffett's comments suggested the firm did not cross reporting thresholds on the investment until the third quarter, which let him keep the stake secret until Monday.

Buffett has also previously asked for, and received, the right to keep some investments temporarily confidential on the grounds that, given his notoriety, if his trades were to be known, masses of investors might try to pile in as well.

The IBM stake was so confidential, in fact, that the company had no idea Buffett was investing in it until he disclosed that he had bought 64 million shares on TV on Monday. An IBM spokesman declined to comment.

According to Thomson Reuters data, Buffett's 5.5 percent position in IBM would tie him with State Street Corpinvestment management affiliate State Street Global Advisors for the largest stake in the company.

During the third quarter, IBM shares traded in a range of $157.14 to $185.61, suggesting that no matter when Buffett bought, he is still up on his investment at least $160 million.

The median analyst price target for the stock is $200, with 14 of 28 analysts rating it a "strong buy" or "buy" and the rest rating it a "hold," according to Thomson Reuters data.

NOT BUYING EUROPE

One thing Buffett is not buying is European banks.

Buffett comes up whenever there is talk of a large European bank needing to raise capital, particularly in the current environment of writedowns on sovereign debt.

But he told CNBC that he would need to understand European banks better before investing, and that he has not yet seen an investment opportunity there in which he wants to take part.

The "Oracle of Omaha" and Berkshire Hathaway chief executive said he expects Europe's economy to show improvement 10 years from now, but getting there will be difficult.

In a three-hour interview, Buffett also disclosed that he was interviewed by the U.S. Securities and Exchange Commission in June about David Sokol, his former heir apparent who left Berkshire amid scandal earlier this year.

Sokol left the company after it emerged he had bought shares in Lubrizol while trying to convince Buffett to acquire it.

Buffett said he had an informal interview with the SEC, which was not a deposition and was not transcribed by a court reporter. He told CNBC the SEC had questions it wanted answered, and he and Berkshire were cooperating.

The Sokol episode turned into a major scandal for Berkshire earlier this year, with Buffett conceding at the company's annual meeting that he had handled the matter poorly.

(Reporting by Ben Berkowitz in New York, additional reporting by Nicola Leske in New York and Jim Finkle in Boston; Editing by Tiffany Wu and Gerald E. McCormick)

Banks posted the largest losses, but overall volume was unusually weak. The KBW bank index dropped 2.5 percent, with Bank of New York Mellon down more than 4 percent.

The S&P 500 found strong resistance after closing on Friday near its 200-day moving average and close to the top of a trading range the index has held for three months.

Initial relief over the appointment of a technocrat to head the new government in Italy after the resignation of Silvio Berlusconi gave way to worries that unpopular austerity measures will not be enough to fix the country's finances. For details see.

Benchmark yields in Italy, France and Spain edged higher from the end of last week and closed near session highs. Rising bond yields are being watched carefully because every rise in interest rates threatens the ability of Italy and other countries to finance themselves.

"That sign of a reversal of what had been a more favorable trend in Europe is what the (equities) market worried about today," said Jeff Kleintop, chief market strategist at LPL Financial in Boston.

"That has raised worries that European problems are not that much behind us."

Stocks have lately focused on headlines from Europe as traders react to the escalating sovereign debt crisis in the euro zone. Italian benchmark bond yields rose above 7 percent last week, a level that forced countries with a lower debt burden to seek bailouts. With debt of more than 2 trillion euros, Italy is considered too big to bail out.

Yields on 10-year Italian debt rose to 6.76 percent on Monday.

The Dow Jones industrial average dropped 74.70 points, or 0.61 percent, at 12,078.98. The Standard & Poor's 500 Index fell 12.07 points, or 0.96 percent, at 1,251.78. The Nasdaq Composite Index lost 21.53 points, or 0.80 percent, at 2,657.22.

At 5.5 billion shares traded on the New York Stock Exchange, NYSE Amex and Nasdaq, the third-lowest number so far this year and down more than 30 percent from the year's daily average of just over 8 billion.

Declining stocks outnumbered advancing ones on the NYSE by a ratio of 16 to 5, while on the Nasdaq, about three stocks fell for every one that rose.

Stocks continued to track the euro, which fell more than 1 percent against the dollar.

Adding to the gloom in the region, industrial production in the euro zone fell in September, the most since early 2009. Output at factories in the 17-nation group declined 2 percent for the month.

LPL Financial's Kleintop said the data mostly confirmed the market's anticipation of a mild recession in the euro zone.

Italy's debt in the credit default swap market rose to a record at the close of 569 basis points, up from 525 basis points on Friday, according to data provider Markit. This means it would cost 569,000 euros per year to insure 10 million euros of Italian debt for five years.

French and Spanish CDs costs also rose to record highs, according to Markit.

Limiting losses on the Dow, Boeing Co shares rose 1.5 percent to $67.94 after the U.S. planemaker announced a large order.

Shares of Bank of America Corp dropped 2.6 percent to $6.05 as the lender plans to sell most of its remaining stake in China Construction Bank Corp for $6.6 billion in a move to raise capital.

Bank of New York Mellon Corp fell 4.5 percent to $20.55 after it said it expects to take a hit against earnings of up to $100 million in the fourth quarter.

(Reporting by Rodrigo Campos; Editing by Kenneth Barry)

A rally on financial markets sparked by the appointment of respected European technocrats in Rome and Athens soon stalled. Analysts warned that daunting obstacles could hinder decisive action needed to breathe new life into their ailing economies.

Italy had to pay a euro-lifetime record yield of 6.3 percent to sell five-year bonds with investors wary of buying its debt until prime minister-designate Mario Monti can undertake profound economic reforms.

In a first sign of trouble for new Greek Prime Minister Lucas Papademos, the leader of the main conservative party rejected any toughening of austerity and refused to sign a letter sought by European authorities pledging support for a new 130 billion euro bailout.

Merkel dramatized the situation facing the euro zone in an attempt to rally her conservative party behind the government at a congress in Leipzig.

"Europe is in one of its toughest, perhaps the toughest hour since World War Two," she told her Christian Democrats (CDU), saying she feared Europe would fail if the euro failed and vowing to do anything to stop this from happening.

In a one-hour address, Merkel called for closer European political union but offered no new ideas for resolving the crisis that has forced bailouts of Greece, Ireland and Portugal, raising fears about the survival of the 17-state currency zone.

European Union governments have until a summit on December 9 to come up with the outlines of a much bolder and more convincing strategy, with some form of massive, visible financial backing.

Prospects are uncertain as the German government, the Bundesbank and hardliners in the European Central Bank have blocked key policy options. These include issuing common euro zone bonds, mutualising the euro zone's debt stock, letting the ECB create money to fight the crisis, or act as a lender of last resort, directly or via the euro zone rescue fund.

HIGH DRAMA IN ROME

In weekend drama, Italy's president asked Monti, a former European commissioner, to form a government to reverse a disastrous collapse of market confidence in an economy whose debt burden is too big for the euro bloc to bail out.

Italians sang, danced and drank champagne in the streets to celebrate the resignation of scandal-plagued billionaire Silvio Berlusconi, and an impromptu orchestra near the presidential palace played the Hallelujah chorus from Handel's Messiah.

The ECB has been buying troubled euro zone governments' bonds episodically to try to stabilize markets. But figures released on Monday showed it halved its weekly bond buy at the height of the Italian government crisis last week, suggesting it was no longer willing to help Berlusconi.

After a tumultuous week, when Italy's borrowing costs rose to the kind of levels that saw Ireland and Greece forced to seek international bailouts, initial market reaction was positive on Monday, with both stocks and bond markets lifted.

But in a sign of the fragile state of confidence, the trend was reversed after the Italian bond auction, and the release of figures showing industrial production slumped by 2 percent in the euro zone in September, raising the specter of recession.

"(Monti) is perceived to be a positive change for the country," said Annalisa Piazza, rate strategist at Newedge.

"Cautiousness on the future developments in Italy is fully justified. Credibility has been lost and it will take a while for market participants to believe that the country is back on the right track."

Monti held talks with political parties on Monday before separate meetings with trade unions and employers on Tuesday, as he moves to appoint what is expected to be a relatively small cabinet made up of experts from outside parliament.

He went to work after a frenetic weekend in which Italy's parliament approved a package of economic reforms agreed with European leaders, clearing the way for Berlusconi to resign.

"Monti spoke about a significant program with many sacrifices," Francesco Nucara, a lawmaker from one of the myriad tiny parliamentary groups involved in the talks, said after meeting the prime minister designate.

"IT DOESN'T END HERE"

But some were skeptical about the strategy to reverse the collapse of market confidence in Italy.

"It doesn't end here" read a headline in Libero, a fiercely pro-Berlusconi daily which said that "the Left and its newspapers may have uncorked the champagne too early".

While Italy's problems and the long-drawn-out departure of Berlusconi have pushed the collapse of the much smaller Greek economy backstage, IMF and European leaders will keep Papademos under pressure to implement radical reforms.

Papademos succeeded George Papandreou, whose proposal to hold a referendum on the bailout terms prompted EU leaders to raise the threat of a Greek exit from the currency bloc.

The new premier, who oversaw Greece's entry to the euro zone in 2002, must win a confidence vote on Wednesday before meeting euro zone finance ministers in Brussels on Thursday.

The Herculean task facing Papademos was illustrated on Monday when New Democracy leader Antonis Samaras said he would not vote for new austerity measures, adding that the policy mix of spending cuts and tax rises agreed with international lenders should be changed in favor of economic growth.

"I agree with the goals to cut government spending ... to reduce debt, to erase the deficit, to make structural changes. I do not agree with whatever stunts growth," he told party MPs.

Inspectors for Greece's international lenders, known as the troika, were due to meet the new administration of Papademos following Wednesday's confidence ballot but uncertainty surfaced over whether they would indeed come.

DISRUPTIVE DEMONSTRATIONS

Most Greeks hailed Papademos's appointment, but thousands of people angry at more than a year of austerity are expected to rally on Thursday, the anniversary of a 1973 student uprising that helped to bring down a 1967-1974 military junta.

That could complicate talks between the troika and the new cabinet, as the demonstration is expected to shut down central Athens and could be the biggest rally in months of protests that have at times erupted into bloody clashes.

"They may come at the end of the week but nothing is fixed," Carlos Martin Ruiz de Gordejuela, spokesman for the European Commission's mission in Greece, said of the troika team, which had been expected to arrive early in the week.

Monday's euro zone industrial production figures pointed to a sharp contraction toward the end of the year and the risk of a double-dip recession.

The slide in output at factories in the 17 nations sharing the single currency was the biggest fall since February 2009 -- when the economy was reeling from the worst financial crisis since the 1930s.

"It clearly doesn't bode well for the future," said Francois Cabau, an economist at Barclays Capital. "If we don't see some resolution of the euro zone sovereign debt crisis, business confidence could go even lower."

(Additional reporting by Philip Pullella and James Mackenzie in Rome, Ben Harding and Harry Papachristou in Athens, Eva Kuehnen in Frankfurt, Alexandra Hudson in Berlin and Robin Emmott in Brussels, writing by Peter Millership; Editing by Paul Taylor)

The euro fell against the dollar as initial optimism about prospects of crisis-fighting reforms under new governments in Italy and Greece gave way to caution over the huge debt problems still plaguing the single currency zone.

Industrial production in the euro zone fell in September, supporting expectations of a sharp contraction of industry and a probable economic recession. Output at factories in the 17-nation bloc fell 2.0 percent for the month.

"What we have here is a market that still remains skeptical as to whether or not Italy's regrouping of its politics will be able to enhance the austerity program," said Peter Cardillo, chief market economist at Rockwell Global Capital. "Remember that Italian politics can be quite surprising at times."

Stocks have traded choppily and in tandem with the euro recently in a sign U.S. investors are taking cues from the euro zone's mushrooming debt crisis as bouts of risk aversion are followed by periods of relative optimism.

S&P 500 futures fell 6.9 points and were below fair value, a formula that evaluates pricing by taking into account interest rates, dividends and time to expiration of the contract. Dow Jones industrial average futures fell 42 points, while Nasdaq 100 futures lost 9.25 points.

Voicing the caution felt in the United States, investor Warren Buffett, chief executive of Berkshire Hathaway Inc (BRKa.N), told CNBC it was not clear Europe has the ability to do whatever it takes to stop the crisis. He said it was too early to buy European sovereign debt or bank shares.

The president of Italy asked former European Commissioner Mario Monti on Sunday to form a government to restore market confidence in an economy whose debt burden is too big for the euro bloc to bail out.

In Greece, new Prime Minister Lucas Papademos, a former central banker who oversaw his country's entry to the euro zone in 2002, will have to win Wednesday's confidence vote in his cabinet before meeting euro zone finance ministers in Brussels on Thursday,

Tokyo's Nikkei .N225 gained 1.1 percent after data showed Japan's economy expanded 1.5 percent in the third quarter, the fastest growth among major industrial nations, as the country bounced back from an earthquake-triggered recession.

European shares fell after an auction of up to 3 billion euros ($4.1 billion) of five-year Italian bonds failed to provide relief to investors. The FTSEurofirst .FTEU3 fell 1.1 percent.

International Business Machines Corp (IBM.N) rose 0.8 percent to $188.85 in premarket trade after Buffett told CNBC he bought shares of the company this year.

Morgan Stanley's (MS.N) Asia private equity arm is in talks to buy a majority stake in Chinese packaging firm HCP Holdings Inc, four sources with knowledge of the matter told Reuters, a deal that could value the company at about $500 million.

(Editing by Padraic Cassidy)

Commodities rose, credit spreads tightened and safe haven government bond yields climbed, all suggesting improved risk appetite, but the renewed confidence faces a big test later on Monday, when Italy is scheduled to hold an auction of 5-year bonds.

European stocks were also expected to gain, with financial bookmakers calling London's FTSE 100 .FTSE to open up 0.5 percent, while benchmark indexes in France .FCHI and Germany .GDAXI were seen rising 1 percent. .EU

"It's good that Italy and Greece avoided political vacuums. But we have to see whether national unity governments will function," said Katsunori Kitakura, chief dealer at Chuo Mitsui Trust Bank in Tokyo.

Italy's president appointed former European Commissioner Mario Monti on Sunday to head a new government with the task of restoring market confidence in the euro zone's third largest economy, whose debt burden is too big for the bloc to bail out.

Meanwhile in Greece, Lucas Papademos, a former European Central Bank policymaker, has been sworn in as prime minister and is under pressure to implement radical reforms.

"Everything went to plan if you like over the weekend, so we're seeing a positive reaction," said Michael Turner, strategist at RBC Capital Markets in Sydney.

Japan's Nikkei share average .N225 rose 1.1 percent, while MSCI's broadest index of Asia Pacific shares outside Japan .MIAPJ0000PUS was up 1.6 percent, with indexes in Hong Kong .HSI, Taiwan .TWII and South Korea .KS11 all jumping more than 2 percent. .T

S&P 500 futures rose 0.4 percent, suggesting a firmer start on Wall Street later.

The gains in Asia continued a rebound that began late last week, with world stocks .MIWD00000PUS rising 2 percent on Friday after Italy's Senate approved austerity measures demanded by the European Union.

John Noonan, head of IFR Markets in Sydney, said the mood on Wall Street suggested that the S&P would sustain a healthy year-end rally as long as Europe avoided total catastrophe.

"The risk bulls say there is just as much anxiety from certain investor groups over the possibility of missing the next 10-15 percent rise in the stock market as there is of the possibility of a meltdown in Europe," he said.

EURO GAINS

The euro traded around $1.3770, up nearly 0.2 percent, having risen as high as $1.3811 in early trade.

Traders warned the market's continued positive reaction hinges on how Italy's planned sale of 3 billion euros of five-year bonds on Monday is received. Subscriptions close at 1000 GMT.

Italian 10-year bond yields soared above 7 percent last week to levels seen as unsustainable. Borrowing costs of more than 7 percent have previously driven Greece, Ireland and Portugal to seek bailouts.

While Italian yields have come off their peaks they remain elevated, and analysts fear Rome's potential inability to fund itself could be a systemic risk given the size of its economy and its status as the world's third-largest government debtor.

Credit spreads tightened in Asia, while in the Japanese government bond market 10-year yields rose 1.5 basis points to 0.975 percent, mirroring a similar move in U.S. Treasuries, where 10-year yields rose around 7 basis points to 2.129 percent.

Commodities markets held gains from the end of last week or rallied further, with U.S. crude creeping above $99 a barrel and Brent crude gaining 0.3 percent to $114.55.

London Metal Exchange copper rose 3 percent, heading back toward the $8,000 a tonne level, and gold gained 0.3 percent to around $1.794 an ounce.

(Additional reporting by Ian Chua in Sydney and Umesh Desai in Hong Kong; Editing by Richard Borsuk)